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Tuesday, June 3, 2014

Good vs. Bad Inequality

In today's WSJ, John Steele Gordon explains the true reason for periodic large disparities in wealth and income between the rich and the relatively less so, and why those disparities are usually indicative of progress and prosperity.

The great growth of fortunes in recent decades is not a sinister development. Instead it is simply the inevitable result of an extraordinary technological innovation, the microprocessor, which Intel brought to market in 1971. Seven of the 10 largest fortunes in America today were built on this technology, as have been countless smaller ones. These new fortunes unavoidably result in wealth being more concentrated at the top. But no one is poorer because Bill Gates, Larry Ellison, et al., are so much richer. These new fortunes came into existence only because the public wanted the products and services—and lower prices—that the microprocessor made possible. Anyone who has found his way home thanks to a GPS device or has contacted a child thanks to a cellphone appreciates the awesome power of the microprocessor. All of our lives have been enhanced and enriched by the technology. This sort of social transformation has happened many times before. Whenever a new technology comes along that greatly reduces the cost of a fundamental input to the economy, or makes possible what had previously been impossible, there has always been a flowering of great new fortunes—often far larger than those that came before. The technology opens up many new economic niches, and entrepreneurs rush to take advantage of the new opportunities.

Steele lists some of the other breakthrough technologies throughout history that have immeasurably improved the living standards of the general public while concurrently producing a new class of fabulously wealthy individuals - the full-rigged ship, the steam engine, railroads, Edwin Drake's oil drilling technique and the Bessemer converter for steel production. Steele warns that attempts to promote economic "equality" by punishing success will ultimately diminish overall prosperity.

The French economist Thomas Piketty, in his new book "Capital in the 21st Century," calls for an 80% tax on incomes over $250,000 and a 2% annual tax on net worth in order to prevent an excessive concentration of wealth. That is a monumentally bad idea.

...Any attempt to tax away new fortunes in the name of preventing inequality is certain to have adverse effects on further technology creation and niche exploitation by entrepreneurs—and harm job creation as a result. The reason is one of the laws of economics: Potential reward must equal the risk or the risk won't be taken.

There's the "good inequality" described by Steele, that which is produced by entrepreneurs in the private sector and is a byproduct of rapid economic growth and job creation. There's also "bad inequality", that which comes about by government obstruction of economic growth. The latter category is exemplified by the Obama administration's recent announcement of new carbon emission rules.

The EPA claims to be targeting "polluters," but the government is essentially creating an artificial scarcity in carbon energy. Scarcities mean higher prices, which will hit the poor far harder than they will the anticarbon crusaders who live in Pacific Heights. The lowest 10% of earners pay three times as much as a share of their income for electricity compared to the middle class. If you want more inequality, this is an ideal way to ensure it.
And the payoff for this government sanctioned impoverishment?...The irony is that all the damage will do nothing for climate change. Based on the EPA's own carbon accounting, shutting down every coal-fired power plant tomorrow and replacing them with zero-carbon sources would reduce the Earth's temperature by about one-twentieth of a degree Fahrenheit in a hundred years.